Greencore must convince investors it has drawn line under US woes

Greencore CEO Patrick Coveney: he pledged in mid-March to spend half his time in the US

Greencore shares have recovered almost half their ground since slumping 30 per cent four days before St Patrick’s Day as the convenience foods group warned that problems in its US business would lead to weaker-than-expected earnings this year.

Chief executive Patrick Coveney will be hoping that he can draw a line under the US woes next Tuesday, when Greencore reports first-half results to the end of March, amid lingering concerns about the US, a market that has stung other listed Irish food and beverage companies in recent years, including Aryzta and C&C.

Coveney pledged in mid-March to spend half his time Stateside to sort out the mess, and restore investor confidence in the company’s ability to deliver.

The first-half results are unlikely to be pretty. Analysts are forecasting as much as a 20 per cent slump in adjusted earnings per share (EPS) to 5p from a year earlier.

That leaves a lot of legwork to be done in the second half to reach its current full-year EPS target of 14.7p-15.7p. Hitting the middle of that range points to a flat performance on 2017.

Coveney spent $747 million (€633.2m) in late 2016 buying Illinois-based Peacock Foods in a bid to quadruple US sales. Yet the main problem is the legacy Greencore business built up over the past decade under Coveney’s watch – at an estimated cost of between $200 million and $250 million.

Investors were first rattled last August when it emerged that Greencore’s legacy plant in Jacksonville, Florida, had lost a large Starbucks contract. It ceased production in March at its loss-making Rhode Island sandwiches and salads facility, which had only opened three years’ ago after an investment of $33 million. And another key plant in Minneapolis has also been underperforming.

Peacock now effectively is Greencore’s US business. It accounts for more than 80 per cent of sales, 90 per cent of capacity and 100 per cent of current profits in the region.

If Coveney is to win back market confidence he will have to demonstrate that he has been able to secure some of the “significant” new contracts he had flagged that were in the works in March from US food groups outsourcing production. This is a fast-growing business line in the US, and the Peacock deal brought a host of top-tier branded customers like Tyson Foods, Kraft-Heinz and Dole.

The hope is that much of the business could go to some of Greencore’s underworked legacy facilities.

In the meantime, analyst Jason Molins of Goodbody Stockbrokers (the company’s broker) remains a fan, highlighting in a note to clients this week the underlying strength of Greencore’s key UK food-to-go business, the potential for Peacock to ultimately deliver in the US, and the stock’s “undemanding valuation”.

Investors will want assurances that Coveney hasn’t taken his eye off the UK market, which has challenges of its own–- not least with two major customers, Sainsbury’s and Asda, plotting a merger that could spur a supermarket price war.

“Despite the opportunity we see here, we do not have to do this deal,” Landau told a Goldman Sachs conference on Wednesday.

The equities market, however, read IP’s promise earlier that day to offer all sorts of sweeteners to woo an unco-operative Smurfit Kappa as an act of desperation, doomed to fail, as the Irish Takeover Panel slapped the group with a three-week deadline to make a binding offer for Smurfit Kappa.

Shares in Smurfit Kappa slumped more than 5 per cent on Wednesday.

Smurfit Kappa has trotted out a number of reasons why IP’s two proposals were so offensive – they undervalued the business; the partial stock-based offers left its investors exposed to various IP risks and many European investors would not want to own shares that can’t be traded on this side of the Atlantic.

On Wednesday, IP said it would seek a secondary London listing for its shares, was open to giving Smurfit Kappa investors less IP stock and more cash, and even hinted that it was prepared to up its bid.

The result was that IP’s share price rose more than 2 per cent – ironically boosting the value of the last proposal to about €9.4 billion. However, some highly-indebted IP’s bonds have dropped in recent days, likely reflecting a fear that Landau and his boss, Mark Sutton, may yet throw the kitchen sink at trying to win over Smurfit Kappa’s board before the June 6th bid deadline.

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